Taking It In The Big Shorts




What, Me Short?

  Excerpted from Matt Taibbi's scathing May 26, 2011 Rolling Stone article The People vs. Goldman Sachs:

"Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives ... lied about.

We know exactly how they ... defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn't leave much doubt: Goldman Sachs should stand trial."

"How did Goldman sell off its 'cats and dogs'? Easy: It assembled new batches of risky mortgage bonds and dumped them on their clients, who took Goldman's word that they were buying a product the bank believed in. The names of the deals Goldman used to clean its books – chief among them Hudson and Timberwolf – are now notorious on Wall Street."

Goldman specifically designed the Hudson deal to reduce its exposure to the very types of mortgages it was selling. One of its creators, trading chief Michael Swenson, later bragged about the "extraordinary profits" he made shorting the housing market. Goldman dumped $1.2 billion of its own "cats and dogs" into the deal – and then told clients that the assets had come not from its own inventory, but had been "sourced from the Street."

Hudson quickly lost a ton of money. Goldman's biggest client, Morgan Stanley, alone lost nearly $960 million on the Hudson deal, which the bank turned around and dumped on taxpayers, who within a year were spending $10 billion bailing out the bank through the TARP program.

Goldman clients who bought into the deal had no idea they were being sold the "cats and dogs" that the bank was "cleaning" off its books. An Australian hedge fund called Basis Capital sank $100 million into the Timberwolf deal on June 18th, 2007, writes Taibbi, "and almost immediately found itself in a full-blown death spiral."

In February 2007, Goldman mortgage chief Daniel Sparks and senior executive Thomas Montag exchanged e-mails about Timberwolf.

MONTAG: "CDO-squared – how big and how dangerous?"
SPARKS: "Roughly $2 billion, and they are the deals to worry about."

In a conference call on May 20th that included Viniar, Sparks oversaw a PowerPoint presentation spelling out Goldman's concern about Timberwolf. In a later e-mail, he wrote: "There is real market-meltdown potential."

Four days after Goldman sold $100 million of Timberwolf to Basis. "Boy," Montag wrote, "that timeberwof [sic] was one shitty deal."

In the spring of 2010, about a year in to his investigation, Senator Levin hauled Goldman execs to Washington, made them take oaths, and demanded that they explain themselves.
Goldman execs lied under oath

• David Viniar insisted that Goldman's massive bet against mortgages was "not a large short." At work, he'd written an email in which he called Goldman's bet "the big short."

• Daniel Sparks claimed that Goldman expected deadly mortgage deals like Timberwolf "to perform." At work, he'd approved an internal document warning that Goldman expected such deals "to underperform."

• Michael Swenson said Goldman had forfeited profits by refusing to bet against mortgages: "We left money on the table." At work, he had bragged about the "extraordinary profits" he made while betting against mortgages.

"Before the hearing, even some of Senator Levin's allies worried privately about his taking on Goldman and other powerful interests. The job, they said, was best left to professional prosecutors, people with experience building cases. ... But in the case of this particular senator, that concern turned out to be misplaced. A Harvard-educated lawyer, Levin has a long record of using his subcommittee to spend a year or more carefully building cases that lead to criminal prosecutions."

"[The] questioning of the bank's executives was not one of those for-the-cameras-only events where congressmen wing ad-libbed questions in search of sound bites. In the weeks leading up to the hearing, Levin's team carefully rehearsed the moment with committee members. They knew the possible answers that Goldman might give, and they were ready with specific counterquestions. What ensued looked more like a good old-fashioned courtroom grilling than a photo-op for grinning congressmen."

"When it came time for Goldman CEO Lloyd Blankfein to testify, the banker hedged and stammered like a brain-addled boxer who couldn't quite follow the questions. ... But Blankfein also testified unequivocally to the following: 'Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008. We didn't have a massive short against the housing market, and we certainly did not bet against our clients.'

"Levin couldn't believe what he was hearing. 'Heck, yes, I was offended,' he says. 'Goldman's CEO claimed the firm didn't have a massive short, when the opposite was true.' First of all, in Goldman's own internal memoranda, the bank calls its giant, $13 billion bet against mortgages "the big short."

Second, by the time Sparks and Co. were unloading the Timberwolves of the world on [unsuspecting clients] in the summer of 2007, Goldman's mortgage department accounted for 54 percent of the bank's risk. That means more than half of all the bank's risk was wrapped up in its bet against the mortgage market – a 'massive short' by any definition."

After releasing his report, Levin sent all of this material to the Justice Department. His conclusion was simple. "In my judgment," he declared, "Goldman clearly misled their clients, and they misled the Congress."

http://www.rollingstone.com/politics/pictures/how-goldman-execs-screwed-their-clients-and-lied-to-congress-20110511

Greg Smith’s ‘Why I Left Goldman Sachs’: A Coming of Age Tale, Not a Goldman Exposé



Shameless Goldman Sachs CEO Lloyd Blankfein tesifies before the Senate in April 2010.

Here's Greg Smith's Why I Left Goldman Sachs 
http://finance.yahoo.com/blogs/the-exchange/book-review-greg-smith-why-left-goldman-sachs-195604181.html


And here's Matt Taibbi's Rolling Stone article:

The People vs. Goldman Sachs

A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges

by Matt Taibbi, May 11, 2011

"...They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it....

... To date, there has been only one successful prosecution of a financial big fish from the mortgage bubble, and that was Lee Farkas, a Florida lender who was just convicted on a smorgasbord of fraud charges and now faces life in prison.

But Farkas, sadly, is just an exception proving the rule: Like Bernie Madoff, his comically excessive crime spree (which involved such lunacies as kiting checks to his own bank and selling loans that didn't exist) was almost completely unconnected to the systematic corruption that led to the crisis.

What's more, many of the earlier criminals in the chain of corruption — from subprime lenders like Countrywide, who herded old ladies and ghetto families into bad loans, to rapacious banks like Washington Mutual, who pawned off fraudulent mortgages on investors — wound up going belly up, sunk by their own greed....."

Read the entire nauseating article at:

http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511

Crime and Punishment in Banking



You gamed the washateria system in 1963 with a cardboard dime (and were actually convicted)? --- you're fired!


When it comes to recent banking system justice, this recent Wells Fargo Home Morgage story made me think of Joseph Stalin's infamous quote:

"The death of one man is a tragedy, the death of millions is a statistic."

"That's what Soviet dictator Joseph Stalin allegedly once said to U.S. ambassador Averill Harriman. And Stalin was an expert on the topic since his regime killed as many 43 million people. It turns out that the mustachioed murderer may have been expressing an acute insight into human psychology. The Washington Post's always interesting Department of Human Behavior columnist Shankar Vedantam reported on the research of University of Oregon professor Paul Slovic who looked at how people respond to humanitarian tragedies."

Here's the whole Post article:

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/04/AR2009010401307.html?sub=AR

We can paraphrase Stalin's meme for banking, The loss of one dime is a crime, the loss of trillions of dollars is a shame."

So while disgraced banking CEOs aren't held quite so liable for gaming with billions of dollars (what "crime?") and even award themselves big bonuses and "golden parachutes," after their unethical and fraudulent tricks fail, this WFHM employee was soundly fired for using a cardboard dime in a washing machine -- 50 years ago. Hey, they had to, it's the law.

DES MOINES, Iowa — A 68-year-old Des Moines man fired from Wells Fargo Home Mortgage over a minor crime 50 years ago has stirred national interest.

Richard Eggers was fired in July when a background review sparked by new federal rules for banks revealed a 1963 conviction for putting a cardboard cutout of a dime in a laundromat's washing machine. He has since received a waiver from the Federal Deposit Insurance Corp., or FDIC, and Wells Fargo offered to rehire him.

But Eggers says he won't accept the bank's offer to return to work unless Wells Fargo changes its background check policy, which he believes discriminates against low-level workers.

Banks have fired thousands of employees like Eggers since new federal banking guidelines were enacted in May 2011. The regulatory rules forbid the employment of anyone convicted of a crime involving dishonesty, breach of trust or money laundering.

The tougher standards are meant to clear out executives and mid-level bank employees guilty of transactional crimes – such as identity theft and money laundering – but banks are applying them across the board because possible fines for noncompliance can total in the millions of dollars.

Before the guidelines were changed, banks widely interpreted the rules to exclude minor traffic offenses and misdemeanors.

San Francisco-based Wells Fargo & Co. said this week that it's disappointed that Eggers doesn't recognize its "responsibility to apply the law equitably and fairly" for all employees.

Oh, really?